Industrials

Why Credit Suisse Just Removed GE From Its Focus List

General Electric Co. (NYSE: GE) has been a top Dow Jones Industrial Average performer in 2015. The conglomerate’s shares have performed better than other conglomerates, and now the Synchrony Financial (NYSE: SYF) exchange has taken place. As of Friday’s close, GE was up more than 24.5% on a total return basis after adjusting for dividend payments.

Now it appears as though Credit Suisse has decided to make two key changes on GE. The first move is negative on the headline basis — GE was removed from Credit Suisse’s Focus List and removed from the Global Focus List. The second bit sounds good on the headline, with Credit Suisse maintaining its Outperform rating and increasing its formal price target to $34.00 from $31.00.

The removal from the focus list seems to be weighing more on the stock than a boost from a higher price target. Credit Suisse’s research team said that GE is no longer considered one of its best investment ideas. GE was also added to the Focus List just back on September 16. The team at Credit Suisse now believes that many of the catalysts that were pointed out at the time have now either played out or are playing out — or they are now becoming reflected in the current share price.

On the higher target, that also comes with a higher earnings estimate. The catalyst there is the closing of the Alstom acquisition. Credit Suisse continues to view GE’s stock as more attractive than most other large conglomerates in the EE/MI sector.

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Credit Suisse does feel that some catalysts are still coming ahead. One is a potential resolution of the GE Appliances divestment, and/or an acquisition in the Oil & Gas arena. Other potential issues for the fourth quarter alone are as follows: GE’s Oil & Gas presentation at Credit Suisse’s Industrials Conference; the 2016 Outlook Meeting; a potential migration of corporate headquarters. Other issues expected in early 2016 are the healthcare analyst meeting and GE’s application for de-designation from SIFI status.

Some rationale behind the good news being priced in is that GE’s consensus forecasts look a little high. The report said:

Our cross-sector EPS estimates for 2016 and the out years remain generally below consensus, and GE is no exception. Our EPS estimate for Q415 falls by $0.01 to $0.02 as we include Alstom. For 2016 and out the out years, our estimates increase with Alstom; for 2016 we forecast $1.46 against consensus at $1.51. While the difference between our estimates and consensus is smaller than for many other companies in our sector, the run-up in its share price may render GE a little more vulnerable to any reduction in sell-side forecasts.

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Still, Credit Suisse did publish that they are more conservative than rival firms on GE. Monday’s report said:

We think our forecasts are more conservative for 2016 than the Street based on the following factors: (i) Organic sales growth – we forecast 0% in 2016, after 3% to 4% in 2015 – Transportation and P&W are likely to slow; (ii) FX – based on updated exchange rates, we assume a $0.02 EPS headwind in 2016 (see our updated EPS bridge inside); (iii) Alstom – we assume $0.05 of EPS accretion, against guidance of $0.05-0.08 Year 1 accretion.

Areas of downside risk to Credit Suisse’s EBIT forecast include the following:

  • Oil & Gas (we forecast EBIT declines by 17% in 2016; at peers such as DOV Energy we forecast a 26% clean EBIT decline next year);
  • Transportation (we assume organic sales and EBIT fall by 3% in 2016, while our headline forecasts also adjust for the signaling exit;
  • Earnings should fall from a high level as the Tier 4 impact wanes and US rail capex sees a cyclical downturn);
  • Aviation (engine peers such as Rolls and Pratt are facing a challenging
    2016; GE is much better-positioned, but could see some challenges around the LEAP ramp-up).

The last issue seen by Credit Suisse’s team was a premium to GE’s competitors. The report said:

We think a premium to the likes of Honeywell and United Tech is warranted given GE’s faster earnings profile (organic and including balance sheet usage); GE’s dividend yield remains higher than both companies. Looking more broadly, the S&P trades on a 2016 P/E of 17x. We think a premium to the S&P is warranted for GE given the very high share (80%+) of its Industrial earnings and cash flow that are Services-driven. If we apply an 18x multiple to $2.1 EPS in 2018, and discount the value back a year (as our price targets are for 12 months) to end-2016, this implies a fair value of $34; adding the 3% dividend yield implies a 15% total return from current levels. As we show inside in a very simplified P/E-based summary, if we apply the current 2016 P/E (using consensus) multiples for the five large conglomerates in our space to our 2018 EPS forecasts, but discount GE’s multiple by 10%, this exercise still implies greater total return potential for GE than the other four stocks.

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GE shares were last seen down 11-cents at $30.55 in fairly active trading for a slow Monday. The 52-week range is $19.37 to $30.99, and GE’s consensus analyst price target is $30.77. Credit Suisse’s price target of $34.00 is now actually $1.00 above the prior highest analyst price target.